How to Use Groupon to Boost Sales

Jason Del Rey was a senior reporter covering technology, branding, and company culture for Inc. magazine. Before joining Inc., his work appeared in Newsday, The (Newark) Star-Ledger, and the Staten Island Advance, and on ESPN.com. He lives in New Jersey.

It was a Wednesday morning in October, and Matt Lincecum's phone wouldn't stop ringing. Each time Lincecum, the founder of Fremont Brewing in Seattle, answered another call, the request was the same: "Can I schedule a tour of the brewery?" For hours, Lincecum tried juggling the nonstop calls himself, but it was too much for him to handle alone. He eventually switched on the answering machine, which greeted callers with a recording that went something like this: "We love you very much, but we are overwhelmed at the moment. Please check our website on Monday to make reservations there."

The reason for the phone calls was Groupon, a popular new website that sends subscribers daily e-mails containing one heavily discounted deal from a local business. Since Groupon, based in Chicago, launched in 2008, more than 3,000 business owners have signed on to offer deals to the company's fast-growing list of subscribers, which now exceeds three million in more than 40 cities. Fremont Brewing had partnered with Groupon to offer a tour of the brewery, a pint of beer, and a pint glass for $7 -- a discount of more than 50 percent. If Groupon subscribers want an offer, they must pay for it in advance on Groupon's website. The offer isn't valid unless a predetermined number of coupons are sold in a 24-hour period. In one day, more than 1,300 Groupon users took Lincecum up on his offer.

Lincecum scrambled to order new glassware and instructed his Web developer to whip up an online reservation system over the weekend. He also hired a new employee to help him with the tours. He figures he spent an extra $6,000, but it wasn't all bad. "Anytime you have 1,300 people who are interested in what you're doing, that's great," says Lincecum. "I was thrilled."

"In terms of a way to spend marketing dollars, there is nothing more effective in getting a customer in the door than Groupon," says Andrew Mason, Groupon's founder and CEO. Many entrepreneurs who have used the service agree, but they also say business owners should carefully calculate the costs involved in offering the discounts. For starters, Groupon typically takes a 50 percent cut of sales. "I think every business needs to understand what they're getting into," says Florian Pfahler, founder and CEO of Hannah's Bretzel, an organic sandwichmaker with two locations in Chicago.

In October, Pfahler partnered with Groupon to offer two sandwiches for the price of one at one of his stores. Within hours, 3,487 Groupon customers had paid $9 each for the coupon, prompting Pfahler to end the offer early. After Groupon's 50 percent cut, Pfahler grossed more than $15,000 in one day. But he knew the added revenue would come with additional costs, including food and labor. Pfahler figures he only broke even on the deal, though he says it was a worthwhile promotion. In the first four months after the deal, 56 percent of the Groupon buyers redeemed their coupons. Close to 40 percent of those customers bought an additional beverage or snack. Many of them were first-time customers. "Business has been up 20 percent since we did the promotion," says Pfahler, "which was refreshing because of the economic downturn."

Lani Henderson was shocked by how many customers responded to her Groupon deal. Henderson, owner of Evolve Dance, which offers pole dancing and "sexy cardio" classes at its studio in Los Angeles, contacted Groupon after seeing one of its ads on Facebook. She decided to offer a package of four classes for $35, down from the normal price of $90.

Groupon ended up selling 617 of the packages. The response prompted Henderson to begin directing customers to her online reservation system and to decrease her Google AdWords budget for fear of drumming up more business than the studio could handle. Like Pfahler, she expects to break even on the deal itself, but she says many of the new customers have since signed up for more classes. "It was great for awareness," Henderson says, noting that she would probably partner with Groupon again.

Still, Henderson was disappointed that she couldn't reach out to the new customers by mass e-mail, because Groupon wouldn't share their addresses. She also wasn't thrilled with the way she was paid. Groupon typically sends payments in three installments: one the week the deal is offered, one 30 days later, and one after 60 days. Mason says Groupon uses an installment plan at the request of the credit card companies it works with. As for the e-mail addresses, Groupon must protect its subscribers' privacy, says Mason. "If we started sharing our customers' e-mail addresses, they would draw and quarter us," he says.

Others grouse about Groupon's fee. "It's a bold thing for a company to make 50 percent for essentially hawking an e-mail list," says Lincecum. Mason makes no apologies. "We have a waiting list of hundreds of businesses in our larger cities," he says. "Demand is much higher than supply. If I remember high school economics correctly, that means our margin is too low." Lincecum admits that his Groupon offer has been a great help in getting the word out about his start-up. "Groupon has been good for us as a marketing tool," he says.